FERC’s order requiring potential refunds of up to $69 million onJanuary bulk power sales in California has come under furtherassault, with San Diego County claiming that the “proxy marketclearing price” established by the Commission in the order allowssellers to recover almost double their marginal production costs,and that the decision not to subject sales during non-Stage 3emergencies to refunds was grossly unfair. It further blasted FERCfor not ordering power suppliers to publicly disclose their ratesand costs.

In seeking rehearing of the March 9 order, San Diego Countrysaid the decision also comes up short because it “allows suppliersto continue charging unjust and reasonable rates” in the Californiawholesale electric markets (see Daily GPI, March 12). It urged theCommission to immediately return to cost-based pricing until thestate’s energy crisis is resolved [EL00-95-019].

Separately, the city of San Diego urged that sellers owingpotential refunds be ordered to “sequester” these amounts in trust,with accumulating interest, to ensure their ability to pay therefunds to California customers in the future. The city claims thatthe “limited liability structure” of the companies of manysuppliers and generators could leave customers in the state highand dry when it comes to the actual paying of refunds.

San Diego County contends the “proxy market clearing price” of$273/MWh for January sales established by FERC in the March 9 orderwas far too excessive, and that the approach taken in the orderwould have permitted average suppliers in California to collectnearly double their marginal costs during the last 10 months (sinceApril). The Commission’s proxy price was based on the assumptionthat the least efficient generator set the market-clearing price.Employing the same inputs for Btu rate, NOx emissions costs andnatural gas prices that FERC used to reach $273/MWh, San Diegocalculated what the proxy price would have been for least-efficientgenerator units for each month since April. Then for comparisonpurposes, it calculated the marginal costs for (more efficient)average generator units and new generator units during the sameperiod.

It found that “marginal costs for the average unit ranged from$36.10 [MWh] to $283.60 [MWh] over this period of time [10 months],while the permissible price under the FERC proxy price assumption[for least-efficient units] would have ranged from $64.40 to$519.03.” In December 2000 and January 2001 in particular, the FERCproxy price would have allowed the average supplier to collect$235.43 MWh and $123.41 MWh, respectively, over its per-unit costs.

As for new generation units, they should have realized a profitof $72.19 MWh per unit over an average unit during December 2000,according to San Diego County. This compares to a profit of almost$318 MWh per unit over total costs that a new unit would haverealized for that month under FERC’s proxy market clearing price,it said

The “blueprint for refund obligations that the Commission hascrafted with this order is woefully inadequate,” San Diego Countytold FERC. “As Commissioner [William] Massey correctly recognizesin his dissent, the $273/MWh proxy market clearing price isexcessive, since it is based on the assumption that the leastefficient generator will set the market clearing price.”

San Diego County also took issue with FERC’s decision to limitsupplier refund obligations to transactions that occur only duringStage 3 emergencies. “While there is no dispute that Stage 3emergencies present supply imbalance situations that are ripe forthe exercise of market power, it is also indisputable that unjustand unreasonable prices resulted from the exercise of market powerin significant portions of 2000 even though there were no Stage 3emergencies before December of that year,” it said.

For example, in June, the California Independent System Operator(Cal-ISO) reported that the average energy cost was $147 MWh, whichwas well above the average generation unit’s estimated cost of$56.30/MWh for that month, according toSan Diego County.

Further, it assailed FERC for failing to order suppliers tosubmit supporting cost data to the Cal-ISO, so that it candetermine the “reasonableness” of overall costs and the magnitudeof potential refunds. “It is ironic that the Commission on the onehand criticizes the accuracy of the ISO’s refund obligationassessment, and on the other hand impedes the ISO from engaging ina more accurate analysis by refusing to compel suppliers to providethe ISO with their cost data,” the county admonished theCommission.

“The Commission’s unwillingness to force the suppliers’ hand onthis issue points to a more fundamental problem in this proceeding.While the Commission has repeatedly promoted the concepts ofopenness and cooperation, it has been unwilling to disclose – orforce the suppliers to disclose – their rate schedules…The Countyurges the Commission to open up this process by make market-basedrates and supplier costs available for public scrutiny.”

In a request for emergency motion, the city of San Diego wantsFERC to act quickly to ensure that the potential refund amounts aresecured for California customers. “…[I]t is highly likely thatthe revenues exceeding such costs – the very revenues that arepotentially subject to a refund order – have been flowing and willcontinue to flow out of the legal entities [suppliers andgenerators] that are subject to the refund obligations, toinvestors who are shielded from the refund exposure due to thelimited liability structure used by sellers,” the city said.

“In short, when the time comes for the sellers to pay thehundreds of millions of dollars in refunds to compensate buyers forpast overcharges, the California ratepayer is going to be treatedas just one more unsecured creditor of the wholesale sellers unlessthis Commission adopts interim protective measures,” it noted.

FERC “should make clear that such amounts are to be retained bythe sellers in trust to fulfill refund obligations. Sellers shouldbe required to report to FERC on a monthly basis the balance of allamounts held in such accounts. In the event that a sellers desiresto make an interim distribution of such amounts to equityinvestors, the seller should file a request…with FERC.”

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